The number of Stocks and Shares ISA millionaires has rocketed over the past decade. This isn’t just thanks to some shrewd stock picking by investors. It’s also down to the massive tax breaks ISA holders enjoy.

With a monthly investment of several hundred pounds, an account holder like me has a great chance to get a spot on millionaire’s row and then enjoy a large passive income in retirement.

Let me show you how.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Here comes the pain

No-one likes paying tax. But it’s surprising how many investors still don’t take the simple steps to reduce (or ideally eliminate) anything they owe to the taxman. The sums can be painful.

Let’s say I’m a basic-rate taxpayer who’s made a £10,000 profit from buying UK shares. Based on a 10% capital gains tax rate, HMRC will grab £700 from me (£10,000 – my £3,000 capital gains allowance x 10%).

If I’m a higher- or additional-rate taxpayer, my tax rate will double to 20%, pushing my financial liability to £1,400.

Depending on my tax status, the tax I owe on dividend income could be even more punishing. A basic-rate taxpayer pays dividend tax at 8.75%, meaning they’d pay £393.75 of tax on dividends of £5,000 (£5,000 – my £500 dividend allowance x 8.75%).

However, the dividend tax rate for higher- and additional-rate taxpayers is even higher, at 33.75% and 39.35% respectively. In these cases, tax on that £5k dividend income would swell to a staggering £1,518.75 and £1,766.25.

Wealth basher

These tax payments are a rare event, but their impact’s ongoing. Taxes reduce the amount of money that can be reinvested which, in turn, affects the power of compound growth. Each pound paid in taxes is a pound that could have been reinvested to generate additional returns.

Over time, it may result in the loss of thousands, if not hundreds of thousands, of pounds.

Millionaire maker

According to Moneyfarm, the annual return on a Stocks and Shares ISA averages 9.64% over the past decade. That’s pretty decent, I’m sure you’ll agree, and reflects the benefits of saving on tax.

Past performance isn’t a guarantee of future results. But if I can replicate this with my own ISA, I could turn a £500 regular monthly investment into £1,047,026 in 30 years.

I’d have become one of those famous ISA millionaires. And by drawing down 4% of this amount each year, I’d enjoy a healthy recurring income of £41,881.

Where to invest

Legal & General Group (LSE:LGEN) is one of the most popular choices with ISA investors. Given the huge dividends it throws out, this may not be a surprise. I own it in my own ISA.

The FTSE 100 company’s highly cash generative, giving it the means to pay a large dividend year after year. Indeed, it’s raised the annual payout every year since the 2008 financial crash, excluding the pandemic period.

City analysts expect another increase in 2024 too. And so the dividend yield on Legal & General shares is an enormous 9.2%.

On the one hand, the business operates in a highly competitive marketplace, which means risk. But market-leading positions in growing markets mean it still looks a good bet for long-term earnings and dividend growth.